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SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2010.
 or
 o
    
    Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to .
 Commission File No. 0-24172
 Southeastern Bank Financial Corporation
  Georgia
    
    58-2005097(State of Incorporation)
    
    (I.R.S. Employer Identification No.)
 3530 Wheeler Road, Augusta, Georgia 30909
 (Issuers telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(do not check if a smaller reporting company)
 Yes o No þ




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##### 



SOUTHEASTERN BANK FINANCIAL CORPORATION
FORM 10-Q
INDEX
 PagePart IItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets as of June 30, 2010 and
December 31, 2009
    
    
    3Consolidated Statements of Income for the Three and Six
Months ended June 30, 2010 and 2009
    
    
    5Consolidated Statements of Cash Flows for the
Six Months ended June 30, 2010 and 2009
    
    
    7Notes to Consolidated Financial Statements
    
    
    9Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    28Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    56Item 4. Controls and Procedures
    
    
    56Part IIOther InformationItem 1. Legal Proceedings
    
    
    57Item 1A. Risk Factors
    
    
    57Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    57Item 3. Defaults Upon Senior Securities
    
    
    57Item 4. Submission of Matters to a Vote of Security Holders
    
    
    57Item 5. Other Information
    
    
    57Item 6. Exhibits
    
    
    58Signature
    
    
    59Exhibit 31.1Exhibit 31.2Exhibit 32.1
  *
    
    No information submitted under this caption  1




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2




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 
   June 30,
    
    
    December 31,2010
    
    
    2009(Unaudited)AssetsCash and due from banks
    
    $
    99,210
    
    
    $
    123,661Federal funds sold
    
    
    7,300
    
    
    
    7,300Interest-bearing deposits in other banks
    
    
    17,276
    
    
    
    17,033Cash and cash equivalents
    
    
    123,786
    
    
    
    147,994Investment securitiesAvailable-for-sale
    
    
    455,050
    
    
    
    306,216Held-to-maturity, at cost (fair values of
$312 and $492, respectively)
    
    
    310
    
    
    
    490Loans held for sale
    
    
    33,142
    
    
    
    19,157Loans
    
    
    900,167
    
    
    
    937,489Less allowance for loan losses
    
    
    23,826
    
    
    
    22,338Loans, net
    
    
    876,341
    
    
    
    915,151Premises and equipment, net
    
    
    30,524
    
    
    
    31,702Accrued interest receivable
    
    
    5,631
    
    
    
    6,091Bank-owned life insurance
    
    
    23,700
    
    
    
    23,248Restricted equity securities
    
    
    6,338
    
    
    
    6,338Other real estate owned
    
    
    7,205
    
    
    
    7,974Prepaid FDIC assessment
    
    
    5,871
    
    
    
    6,886Deferred tax asset
    
    
    8,839
    
    
    
    11,160Other assets
    
    
    4,191
    
    
    
    8,712$
    1,580,928
    
    
    $
    1,491,119
  3




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 
 June 30,
    
    
    December 31,2010
    
    
    2009(Unaudited)Liabilities and Stockholders EquityDepositsNoninterest-bearing
    
    $
    118,212
    
    
    $
    114,780Interest-bearing:NOW accounts
    
    
    318,982
    
    
    
    210,438Savings
    
    
    382,696
    
    
    
    343,740Money management accounts
    
    
    36,479
    
    
    
    44,781Time deposits over $100
    
    
    370,041
    
    
    
    418,751Other time deposits
    
    
    145,032
    
    
    
    148,0441,371,442
    
    
    
    1,280,534Securities sold under repurchase agreements
    
    
    448
    
    
    
    3,188Advances from Federal Home Loan Bank
    
    
    72,000
    
    
    
    77,000Other borrowed funds
    
    
    900
    
    
    
    600Accrued interest payable and other liabilities
    
    
    11,384
    
    
    
    13,106Subordinated debentures
    
    
    22,947
    
    
    
    22,947Total liabilities
    
    
    1,479,121
    
    
    
    1,397,375Stockholders equity:Preferred stock, no par value; 10,000,000 shares
authorized; 0 shares outstanding in 2010 and
2009, respectively
    
    
    
    
    
    
    Common stock, $3.00 par value; 10,000,000 shares
authorized; 6,673,925 and 6,672,826 shares issued
and outstanding in 2010 and 2009, respectively
    
    
    20,022
    
    
    
    20,018Additional paid-in capital
    
    
    62,488
    
    
    
    62,360Retained earnings
    
    
    15,567
    
    
    
    12,692Accumulated other comprehensive income (loss), net
    
    
    3,730
    
    
    
    (1,326
    )Total stockholders equity
    
    
    101,807
    
    
    
    93,744$
    1,580,928
    
    
    $
    1,491,119
   4




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 
    Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Interest income:Loans, including fees
    
    $
    13,517
    
    
    $
    14,206
    
    
    $
    26,860
    
    
    $
    28,010Investment securities
    
    
    3,955
    
    
    
    3,595
    
    
    
    7,374
    
    
    
    7,669Federal funds sold
    
    
    3
    
    
    
    10
    
    
    
    7
    
    
    
    22Interest-bearing deposits in other banks
    
    
    94
    
    
    
    24
    
    
    
    182
    
    
    
    41Total interest income
    
    
    17,569
    
    
    
    17,835
    
    
    
    34,423
    
    
    
    35,742Interest expense:Deposits
    
    
    5,319
    
    
    
    6,009
    
    
    
    10,686
    
    
    
    12,810Federal funds purchased and securities sold
under repurchase agreements
    
    
    5
    
    
    
    95
    
    
    
    16
    
    
    
    206Other borrowings
    
    
    891
    
    
    
    1,023
    
    
    
    1,845
    
    
    
    1,919Total interest expense
    
    
    6,215
    
    
    
    7,127
    
    
    
    12,547
    
    
    
    14,935Net interest income
    
    
    11,354
    
    
    
    10,708
    
    
    
    21,876
    
    
    
    20,807Provision for loan losses
    
    
    3,794
    
    
    
    5,114
    
    
    
    7,082
    
    
    
    9,863Net interest income after provision
for loan losses
    
    
    7,560
    
    
    
    5,594
    
    
    
    14,794
    
    
    
    10,944Noninterest income:Service charges and fees on deposits
    
    
    1,748
    
    
    
    1,737
    
    
    
    3,343
    
    
    
    3,378Gain on sales of loans
    
    
    2,223
    
    
    
    2,461
    
    
    
    3,576
    
    
    
    4,697Gain (loss) on sale of fixed assets
    
    
    
    
    
    
    (42
    )
    
    
    27
    
    
    
    (16
    )Investment securities gains (losses), net
    
    
    149
    
    
    
    1,101
    
    
    
    162
    
    
    
    1,312Other-than-temporary lossTotal impairment loss
    
    
    
    
    
    
    (816
    )
    
    
    
    
    
    
    (1,191
    )Loss recognized in other comprehensive loss
    
    
    
    
    
    
    572
    
    
    
    
    
    
    
    572Net impairment loss recognized in earnings
    
    
    
    
    
    
    (244
    )
    
    
    
    
    
    
    (619
    )Retail investment income
    
    
    416
    
    
    
    318
    
    
    
    751
    
    
    
    527Trust service fees
    
    
    290
    
    
    
    245
    
    
    
    577
    
    
    
    498Increase in cash surrender value of
bank-owned life insurance
    
    
    223
    
    
    
    213
    
    
    
    452
    
    
    
    394Miscellaneous income
    
    
    156
    
    
    
    123
    
    
    
    317
    
    
    
    286Total noninterest income
    
    
    5,205
    
    
    
    5,912
    
    
    
    9,205
    
    
    
    10,457Noninterest expense:Salaries and other personnel expense
    
    
    5,915
    
    
    
    5,800
    
    
    
    11,409
    
    
    
    11,458Occupancy expenses
    
    
    1,166
    
    
    
    1,140
    
    
    
    2,337
    
    
    
    2,281Other real estate (gains) losses
    
    
    414
    
    
    
    179
    
    
    
    328
    
    
    
    291Other operating expenses
    
    
    3,067
    
    
    
    3,689
    
    
    
    5,920
    
    
    
    6,612Total noninterest expense
    
    
    10,562
    
    
    
    10,808
    
    
    
    19,994
    
    
    
    20,642Income before income taxes
    
    
    2,203
    
    
    
    698
    
    
    
    4,005
    
    
    
    759Income tax expense
    
    
    583
    
    
    
    61
    
    
    
    1,130
    
    
    
    66Net income
    
    $
    1,620
    
    
    $
    637
    
    
    $
    2,875
    
    
    $
    693
  5




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Basic net income per share
    
    $
    0.24
    
    
    $
    0.10
    
    
    $
    0.43
    
    
    $
    0.11Diluted net income per share
    
    $
    0.24
    
    
    $
    0.10
    
    
    $
    0.43
    
    
    $
    0.11Weighted average common shares outstanding
    
    
    6,673,925
    
    
    
    6,348,312
    
    
    
    6,673,631
    
    
    
    6,169,125Weighted average number of common and
common equivalent shares outstanding
    
    
    6,673,968
    
    
    
    6,354,344
    
    
    
    6,673,631
    
    
    
    6,177,569
  6




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 
    Six Months EndedJune 30,2010
    
    
    2009Cash flows from operating activities:Net income
    
    $
    2,875
    
    
    $
    693Adjustments to reconcile net income to net cash
provided by operating activitiesDepreciation
    
    
    1,365
    
    
    
    1,336Deferred income tax benefit
    
    
    (804
    )
    
    
    Provision for loan losses
    
    
    7,082
    
    
    
    9,863Net investment securities (gains) losses
    
    
    (162
    )
    
    
    (693
    )Net amortization of premium (accretion of discount)
on investment securities
    
    
    584
    
    
    
    (90
    )Increase in CSV of bank-owned life insurance
    
    
    (452
    )
    
    
    (394
    )Stock options compensation cost
    
    
    120
    
    
    
    94(Gain) loss on disposal of premises and equipment
    
    
    (27
    )
    
    
    16(Gain) loss on the sale of other real estate
    
    
    (369
    )
    
    
    291Increase in other real estate valuation allowance
    
    
    697
    
    
    
    Gain on sales of loans
    
    
    (3,576
    )
    
    
    (4,697
    )Real estate loans originated for sale
    
    
    (144,349
    )
    
    
    (219,406
    )Proceeds from sales of real estate loans
    
    
    133,939
    
    
    
    219,083Decrease in accrued interest receivable
    
    
    460
    
    
    
    820Decrease (increase) in other assets
    
    
    5,536
    
    
    
    (545
    )(Decrease) increase in accrued interest payable and other liabilities
    
    
    (1,722
    )
    
    
    456Net cash provided by operating activities
    
    
    1,197
    
    
    
    6,827Cash flows from investing activities:Proceeds from sales of available-for-sale securities
    
    
    20,364
    
    
    
    58,439Proceeds from maturities and calls of available-for-sale securities
    
    
    65,453
    
    
    
    90,467Proceeds from maturities of held-to-maturity securities
    
    
    180
    
    
    
    203Purchase of available-for-sale securities
    
    
    (226,892
    )
    
    
    (126,515
    )Purchase of restricted equity securities
    
    
    
    
    
    
    (299
    )Net decrease in loans
    
    
    26,184
    
    
    
    9,225Purchase of bank-owned life insurance
    
    
    
    
    
    
    (5,000
    )Additions to premises and equipment
    
    
    (189
    )
    
    
    (570
    )Proceeds from sale of other real estate
    
    
    5,985
    
    
    
    2,961Proceeds from sale of premises and equipment
    
    
    30
    
    
    
    270Net cash (used) provided by investing activities
    
    
    (108,885
    )
    
    
    29,181
  7




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SOUTHEASTERN BANK FINANCIAL CORPORATION AND SUBSIDIARIES
 
  Six Months EndedJune 30,2010
    
    
    2009Cash flows from financing activities:Net increase in deposits
    
    
    90,908
    
    
    
    51,724Net decrease in federal funds purchased and
securities sold under repurchase agreements
    
    
    (2,740
    )
    
    
    (13,192
    )Payments of Federal Home Loan Bank advances
    
    
    (5,000
    )
    
    
    Proceeds from subordinated debentures
    
    
    
    
    
    
    2,947Proceeds from other borrowed funds
    
    
    300
    
    
    
    700Purchase of treasury stock
    
    
    
    
    
    
    (5
    )Proceeds from issuance of common stock
    
    
    
    
    
    
    9,010Payment of cash dividends
    
    
    
    
    
    
    (778
    )Proceeds from Directors stock purchase plan
    
    
    12
    
    
    
    15Net cash provided by financing activities
    
    
    83,480
    
    
    
    50,421Net (decrease) increase in cash and cash equivalents
    
    $
    (24,208
    )
    
    $
    86,429Cash and cash equivalents at beginning of period
    
    
    147,994
    
    
    
    37,768Cash and cash equivalents at end of period
    
    $
    123,786
    
    
    $
    124,197Supplemental disclosures of cash paid during the period for:Interest
    
    $
    12,660
    
    
    $
    15,879Income taxes
    
    $
    1,846
    
    
    $
    336Supplemental information on noncash investing activities:Loans transferred to other real estate
    
    $
    5,544
    
    
    $
    11,305
   8




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Accounting for Various
Topics, Technical Corrections to SEC Paragraphs. Technical Corrections to Various Topics.
  9




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10




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June 30, 2010Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Estimatedcost
    
    
    gains
    
    
    losses
    
    
    fair value(Dollars in thousands)Available-for-saleMortgage backed securitiesU.S. GSEs MBS  residential*
    
    $
    71,778
    
    
    
    3,480
    
    
    
    (86
    )
    
    
    75,172U.S. GSEs CMO
    
    
    148,319
    
    
    
    2,168
    
    
    
    (143
    )
    
    
    150,344Other CMO
    
    
    4,384
    
    
    
    2
    
    
    
    (146
    )
    
    
    4,240Total MBS
    
    $
    224,481
    
    
    
    5,650
    
    
    
    (375
    )
    
    
    229,756Obligations of U.S.Government agencies
    
    $
    182,738
    
    
    
    720
    
    
    
    (33
    )
    
    
    183,425Obligations of states and
political subdivisions
    
    
    31,138
    
    
    
    535
    
    
    
    (376
    )
    
    
    31,297Corporate bonds
    
    
    10,681
    
    
    
    328
    
    
    
    (442
    )
    
    
    10,567Equity securities
    
    
    4
    
    
    
    1
    
    
    
    
    
    
    
    5$
    449,042
    
    
    
    7,234
    
    
    
    (1,226
    )
    
    
    455,050Held-to-maturityObligations of states and
political subdivisions
    
    $
    310
    
    
    
    2
    
    
    
    
    
    
    
    312$
    310
    
    
    
    2
    
    
    
    
    
    
    
    312
 *
    
    Government sponsored entities  11




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##### Table of Contents



December 31, 2009Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Estimatedcost
    
    
    gains
    
    
    losses
    
    
    fair value(Dollars in thousands)Available-for-saleMortgage backed securitiesU.S. GSEs MBS  residential
    
    $
    86,463
    
    
    
    2,245
    
    
    
    (107
    )
    
    
    88,601U.S. GSEs CMO
    
    
    107,153
    
    
    
    1,116
    
    
    
    (1,427
    )
    
    
    106,842Other CMO
    
    
    8,484
    
    
    
    142
    
    
    
    (399
    )
    
    
    8,227Total MBS
    
    $
    202,100
    
    
    
    3,503
    
    
    
    (1,933
    )
    
    
    203,670Obligations of U.S.Government agencies
    
    $
    67,290
    
    
    
    43
    
    
    
    (1,003
    )
    
    
    66,330Obligations of states and
political subdivisions
    
    
    26,402
    
    
    
    299
    
    
    
    (521
    )
    
    
    26,180Corporate bonds
    
    
    12,591
    
    
    
    35
    
    
    
    (2,594
    )
    
    
    10,032Equity securities
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    4$
    308,387
    
    
    
    3,880
    
    
    
    (6,051
    )
    
    
    306,216Held-to-maturityObligations of states and
political subdivisions
    
    $
    490
    
    
    
    2
    
    
    
    
    
    
    
    492$
    490
    
    
    
    2
    
    
    
    
    
    
    
    492
  June 30, 2010Amortized
    
    
    Estimatedcost
    
    
    fair value(Dollars in thousands)Available-for-sale:One year or less
    
    $
    618
    
    
    
    620After one year through five years
    
    
    3,123
    
    
    
    3,173After five years through ten years
    
    
    85,409
    
    
    
    86,544After ten years
    
    
    359,888
    
    
    
    364,708$
    449,038
    
    
    
    455,045Held-to-maturity:After one year through five years
    
    $
    310
    
    
    
    312$
    310
    
    
    
    312
  12




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June 30, 2010Less than 12 months
    
    
    12 months or longer
    
    
    TotalEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealizedfair value
    
    
    loss
    
    
    fair value
    
    
    loss
    
    
    fair value
    
    
    loss(Dollars in thousands)Temporarily impairedMortgage backed securitiesU.S. GSEs MBS 
residential
    
    $
    
    
    
    
    
    
    
    
    564
    
    
    
    86
    
    
    
    564
    
    
    
    86U.S. GSEs CMO
    
    
    28,528
    
    
    
    143
    
    
    
    
    
    
    
    
    
    
    
    28,528
    
    
    
    143Other CMO
    
    
    
    
    
    
    
    
    
    
    3,059
    
    
    
    146
    
    
    
    3,059
    
    
    
    146Total MBS
    
    $
    28,528
    
    
    
    143
    
    
    
    3,623
    
    
    
    232
    
    
    
    32,151
    
    
    
    375Obligations of U.S.Government agencies
    
    $
    24,435
    
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    24,435
    
    
    
    33Obligations of states and
political subdivisions
    
    
    2,424
    
    
    
    33
    
    
    
    6,044
    
    
    
    343
    
    
    
    8,468
    
    
    
    376Corporate bonds
    
    
    
    
    
    
    
    
    
    
    6,334
    
    
    
    442
    
    
    
    6,334
    
    
    
    442$
    55,387
    
    
    
    209
    
    
    
    16,001
    
    
    
    1,017
    
    
    
    71,388
    
    
    
    1,226
 December 31, 2009Less than 12 months
    
    
    12 months or longer
    
    
    TotalEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealized
    
    
    Estimated
    
    
    Unrealizedfair value
    
    
    loss
    
    
    fair value
    
    
    loss
    
    
    fair value
    
    
    loss(Dollars in thousands)Temporarily impairedMortgage backed securitiesU.S. GSEs MBS  residential
    
    $
    21,444
    
    
    
    107
    
    
    
    
    
    
    
    
    
    
    
    21,444
    
    
    
    107U.S. GSEs CMO
    
    
    61,373
    
    
    
    1,408
    
    
    
    665
    
    
    
    19
    
    
    
    62,038
    
    
    
    1,427Other CMO
    
    
    552
    
    
    
    98
    
    
    
    4,243
    
    
    
    285
    
    
    
    4,795
    
    
    
    383Total MBS
    
    $
    83,369
    
    
    
    1,613
    
    
    
    4,908
    
    
    
    304
    
    
    
    88,277
    
    
    
    1,917Obligations of U.S.Government agencies
    
    $
    43,528
    
    
    
    1,003
    
    
    
    
    
    
    
    
    
    
    
    43,528
    
    
    
    1,003Obligations of states and
political subdivisions
    
    
    8,644
    
    
    
    220
    
    
    
    4,457
    
    
    
    301
    
    
    
    13,101
    
    
    
    521Corporate bonds
    
    
    733
    
    
    
    267
    
    
    
    6,291
    
    
    
    2,327
    
    
    
    7,024
    
    
    
    2,594$
    136,274
    
    
    
    3,103
    
    
    
    15,656
    
    
    
    2,932
    
    
    
    151,930
    
    
    
    6,035Other-than-temporarily impairedMortgage backed securitiesOther CMO
    
    $
    
    
    
    
    
    
    
    
    748
    
    
    
    16
    
    
    
    748
    
    
    
    16$
    136,274
    
    
    
    3,103
    
    
    
    16,404
    
    
    
    2,948
    
    
    
    152,678
    
    
    
    6,051
    13




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##### Table of Contents



Other-Than-Temporary Impairment  June 30, 2010
 Investments  Debt and Equity Securities.
    14




---



##### Table of Contents



Other-Than-Temporary Impairment  June 30, 2009
   Mortgage-backed Securities
      15




---



##### Table of Contents



Corporate Securities
     16




---



##### Table of Contents



Beginning balance, April 1, 2009
    
    $
    375Amounts related to credit loss for which
an other-than-temporary impairment
was not previously recognized
    
    
    119Additions/SubtractionsAmounts realized for securities sold during the period
    
    
    Amounts related to securities for which the company
intends to sell or that it will be more likely than not
that the company will be required to sell prior to
recovery of amortized cost basis
    
    
    Reductions for increase in cash flows expected to be
collected that are recognized over the remaining
life of the security
    
    
    Increases to the amount related to the credit
loss for which other-than-temporary impairment was
previously recognized
    
    
    125Ending balance, June 30, 2009
    
    
    619
  SilvertonFinancialServices, Inc
    
    
    CMO 1
    
    
    CMO 2
    
    
    Total(Dollars in thousands)Amount of other-than-temporary
impairment
related to credit losses at April 1, 2009
    
    $
    375
    
    
    $
    
    
    
    $
    
    
    
    $
    375Addition for credit losses recognized in
earnings
    
    
    125
    
    
    
    57
    
    
    
    62
    
    
    
    244Amount of other-than-temporary impairment
related to credit losses at June 30, 2009
    
    $
    500
    
    
    $
    57
    
    
    $
    62
    
    
    $
    619
   17




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##### Table of Contents



EstimatedAmortized
    
    
    Fair
    
    
    Unrealized
    
    
    Ratings as of June 30, 2009cost
    
    
    Value
    
    
    Losses
    
    
    S&P
    
    
    Fitch
    
    
    Moodys(Dollars in thousands)Silverton Financial Services,
Inc.
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    NR
    
    NR
    
    NRCMO 1
    
    
    925
    
    
    
    721
    
    
    
    (204
    )
    
    
    B*-
    
    
    CCC
    
    NRCMO 2
    
    
    1,628
    
    
    
    1,260
    
    
    
    (368
    )
    
    AAA*-
    
    NR
    
    Caa2Total
    
    $
    2,553
    
    
    $
    1,981
    
    
    $
    (572
    )
   June 30, 2010
    
    
    June 30, 2009(Dollars in thousands)Commercial, financial, and agricultural
    
    $
    96,087
    
    
    $
    100,139Real estate:Commercial
    
    
    323,375
    
    
    
    282,095Residential
    
    
    232,830
    
    
    
    209,836Acquisition, development
and construction
    
    
    227,200
    
    
    
    339,944Consumer installment
    
    
    20,668
    
    
    
    25,945$
    900,160
    
    
    $
    957,959Less allowance for loan losses
    
    
    23,826
    
    
    
    16,031Less deferred loan origination fees (costs)
    
    
    (7
    )
    
    
    232$
    876,341
    
    
    $
    941,696
  June 30, 2010
    
    
    June 30, 2009(Dollars in thousands)Balance, beginning of year
    
    $
    22,338
    
    
    
    14,742Provision for loan losses
    
    
    7,082
    
    
    
    9,863Charge-offs
    
    
    (6,498
    )
    
    
    (9,074
    )Recoveries
    
    
    904
    
    
    
    500Balance, end of year
    
    $
    23,826
    
    
    
    16,031
  18




---



##### Table of Contents



June 30, 2010
    
    
    June 30, 2009(Dollars in thousands)Period end loans with no allocated allowance
for loan losses
    
    $
    26,207
    
    
    $
    17,449Period end loans with allocated allowance
for loan losses
    
    
    2,474
    
    
    
    17,177$
    28,681
    
    
    $
    34,626Amount of the allowance for loan loss allocated
    
    $
    538
    
    
    $
    3,170
 June 30, 2010
    
    
    June 30, 2009(Dollars in thousands)Average of
individually impaired loans during year
    
    $
    27,836
    
    
    $
    39,817Interest income recognized during impairment
    
    
    66
    
    
    
    195Cash-basis interest income recognized
    
    
    66
    
    
    
    195
  June 30, 2010
    
    
    June 30, 2009(Dollars in thousands)Loans past due over 90 days still on accrual
    
    $
    299
    
    
    $
    3,478Nonaccrual loans
    
    
    31,803
    
    
    
    39,564
   19




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##### Table of Contents



Level 1:
    
    Quoted prices (unadjusted) for identical assets or liabilities in
active markets that the entity has the ability to access as of
the measurement date.Level 2:
    
    Significant other observable inputs other than Level 1 prices,
such as quoted market prices for similar assets or liabilities,
quoted prices in markets that are not active, or other inputs
that are observable or can be corroborated by observable market
data.Level 3:
    
    Significant unobservable inputs that reflect a companys own
assumptions about the assumptions that market participants would
use in pricing an asset or liability.
  Investment Securities
 Mortgage Banking Derivatives:
 Loans Held for Sale
 Impaired Loans
 Investments
in Tax Credits
  20




---



##### Table of Contents



Other Real Estate Owned
 Assets and Liabilities Measured on a Recurring Basis
  Quoted Prices in
    
    
    Significant Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableJune 30,
    
    
    Identical Assets
    
    
    Inputs
    
    
    Inputs2010
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)(Dollars in thousands)Available-for-sale securitiesObligations of U.S.Government agencies
    
    $
    183,425
    
    
    
    64,046
    
    
    
    119,379
    
    
    
    Obligations of states and
political subdivisions
    
    
    31,297
    
    
    
    500
    
    
    
    30,797
    
    
    
    Mortgage-backed securitiesU.S. GSEs MBS  residential
    
    
    75,172
    
    
    
    5,048
    
    
    
    69,561
    
    
    
    563U.S. GSEs CMO
    
    
    150,344
    
    
    
    28,367
    
    
    
    121,977
    
    
    
    Other CMO
    
    
    4,240
    
    
    
    
    
    
    
    1,061
    
    
    
    3,179Corporate bonds
    
    
    10,567
    
    
    
    
    
    
    
    
    
    
    
    10,567Equity securities
    
    
    5
    
    
    
    5
    
    
    
    
    
    
    
    Total available-for-sale securities
    
    $
    455,050
    
    
    
    97,966
    
    
    
    342,775
    
    
    
    14,309Tax credits
    
    
    395
    
    
    
    
    
    
    
    
    
    
    
    395Loans held for sale
    
    
    33,142
    
    
    
    
    
    
    
    33,142
    
    
    
    Mortgage banking derivatives
    
    
    47
    
    
    
    
    
    
    
    47
    
    
    
    Total
    
    $
    488,634
    
    
    
    97,966
    
    
    
    375,964
    
    
    
    14,704
  21




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##### Table of Contents



Quoted Prices in
    
    
    Significant Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableDecember 31,
    
    
    Identical Assets
    
    
    Inputs
    
    
    Inputs2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)(Dollars in thousands)Available-for-sale securitiesObligations of U.S.Government agencies
    
    $
    66,330
    
    
    
    21,663
    
    
    
    44,667
    
    
    
    Obligations of states and
political subdivisions
    
    
    26,180
    
    
    
    
    
    
    
    26,180
    
    
    
    Mortgage-backed securitiesU.S. GSEs MBS  residential
    
    
    88,601
    
    
    
    
    
    
    
    88,601
    
    
    
    U.S. GSEs CMO
    
    
    106,842
    
    
    
    10,510
    
    
    
    96,332
    
    
    
    Other CMO
    
    
    8,227
    
    
    
    
    
    
    
    3,894
    
    
    
    4,333Corporate bonds
    
    
    10,032
    
    
    
    
    
    
    
    
    
    
    
    10,032Equity securities
    
    
    4
    
    
    
    4
    
    
    
    
    
    
    
    Total available-for-sale securities
    
    $
    306,216
    
    
    
    32,177
    
    
    
    259,674
    
    
    
    14,365Tax credits
    
    
    435
    
    
    
    
    
    
    
    
    
    
    
    435Loans held for sale
    
    
    19,157
    
    
    
    
    
    
    
    19,157
    
    
    
    Mortgage banking derivatives
    
    
    182
    
    
    
    
    
    
    
    182
    
    
    
    Total
    
    $
    325,990
    
    
    
    32,177
    
    
    
    279,013
    
    
    
    14,800
  Fair Value Measurements Using Significant Unobservable Inputs (Level 3)Available-for-saleTax credits
    
    
    Securities
    
    
    Total(Dollars in thousands)Beginning balance, January 1, 2010
    
    $
    435
    
    
    
    14,365
    
    
    
    14,800Total gains or losses (realized/unrealized)Included in earningsGain (loss) on sales
    
    
    
    
    
    
    (122
    )
    
    
    (122
    )Other-than-temporary impairment
    
    
    
    
    
    
    
    
    
    
    Amortization of tax credit investment
    
    
    (40
    )
    
    
    
    
    
    
    (40
    )Included in other comprehensive income
    
    
    
    
    
    
    1,856
    
    
    
    1,856Purchases, sales, issuances and settlements, net
    
    
    
    
    
    
    (1,790
    )
    
    
    (1,790
    )Transfers in and/or out of Level 3
    
    
    
    
    
    
    
    
    
    
    Ending balance, June 30, 2010
    
    $
    395
    
    
    
    14,309
    
    
    
    14,704
  22




---



##### Table of Contents



Fair Value Measurements Using Significant Unobservable Inputs (Level 3)Available-for-saleTax credits
    
    
    Securities
    
    
    Total(Dollars in thousands)Beginning balance, January 1, 2009
    
    $
    515
    
    
    
    4,130
    
    
    
    4,645Total gains or losses (realized/unrealized)Included in earningsOther-than-temporary impairment
    
    
    
    
    
    
    (119
    )
    
    
    (119
    )Amortization of tax credit investment
    
    
    (41
    )
    
    
    
    
    
    
    (41
    )Included in other comprehensive income
    
    
    
    
    
    
    1,162
    
    
    
    1,162Transfers in and/or out of Level 3
    
    
    
    
    
    
    9,614
    
    
    
    9,614Ending balance, June 30, 2009
    
    $
    474
    
    
    
    14,787
    
    
    
    15,261
 Assets and Liabilities Measured on a Non-Recurring Basis
  Quoted Prices in
    
    
    Significant Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableJune 30,
    
    
    Identical Assets
    
    
    Inputs
    
    
    Inputs2010
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)(Dollars in thousands)Assets:Impaired loans
    
    $
    20,407
    
    
    
    
    
    
    
    
    
    
    
    20,407Other real estate owned
    
    
    7,205
    
    
    
    
    
    
    
    
    
    
    
    7,205
 Quoted Prices in
    
    
    Significant Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableDecember 31,
    
    
    Identical Assets
    
    
    Inputs
    
    
    Inputs2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)(Dollars in thousands)Assets:Impaired loans
    
    $
    22,581
    
    
    
    
    
    
    
    
    
    
    
    22,581Other real estate owned
    
    
    7,974
    
    
    
    
    
    
    
    
    
    
    
    7,974
    23




---



##### Table of Contents



24




---



##### Table of Contents



(a)
    
    Cash and Cash Equivalents and Federal Funds Sold
 Fair value equals the carrying value of such assets due to their nature.
 (b)
    
    Investment Securities
 The fair values of investment securities are determined as discussed above.
 (c)
    
    Loans
 The fair value of loans is calculated using discounted cash flows by loan type. The
discount rate used to determine the present value of the loan portfolio is an estimated
market rate that reflects the credit and interest rate risk inherent in the loan
portfolio without considering widening credit spreads due to market illiquidity. The
estimated maturity is based on the Companys historical experience with repayments
adjusted to estimate the effect of current market conditions. The carrying amount of
related accrued interest receivable approximates its fair value and is not disclosed.
The carrying amount of real estate loans originated for sale approximates their fair
value. The allowance for loan losses is considered a reasonable discount for credit
risk.
 (d)
    
    Deposits
 Fair values for certificates of deposit have been determined using discounted cash
flows. The discount rate used is based on estimated market rates for deposits of
similar remaining maturities. The carrying amounts of all other deposits, due to their
short-term nature, approximate their fair values. The carrying amount of related
accrued interest payable approximates its fair value and is not disclosed.
 (e)
    
    Securities Sold Under Repurchase Agreements
 Fair value approximates the carrying value of such liabilities due to their short-term
nature.
 (f)
    
    Other Borrowed Funds
 Fair value approximates the carrying value of such liabilities as the borrowings are at
a variable rate of interest.
 (g)
    
    Advances from Federal Home Loan Bank
 The fair value of the Federal Home Loan Bank (FHLB) advances is obtained from the
FHLB and is calculated by discounting contractual cash flows using an estimated interest rate based on the current rates available to the
Company for debt of similar remaining maturities and collateral terms.
  25




---



##### Table of Contents



(h)
    
    Subordinated debentures
 The fair value for subordinated debentures is calculated based upon current market
spreads to LIBOR for debt of similar remaining maturities and collateral terms.
 (i)
    
    Commitments
 The difference between the carrying values and fair values of commitments to extend
credit are not significant and are not disclosed.
  June 30, 2010Carrying
    
    
    Estimatedamount
    
    
    fair value(Dollars in thousands)Financial assets:Cash and cash
equivalents
    
    $
    123,786
    
    
    
    123,786Investment securities
    
    
    455,360
    
    
    
    455,362Loans, net
    
    
    909,483
    
    
    
    907,595Financial liabilities:Deposits with stated maturities
    
    
    515,073
    
    
    
    518,476Deposits without stated maturities
    
    
    856,369
    
    
    
    856,369Securities sold under
repurchase agreements
    
    
    448
    
    
    
    448Other borrowed funds
    
    
    900
    
    
    
    900Advances from FHLB
    
    
    72,000
    
    
    
    77,480Subordinated debentures
    
    
    22,947
    
    
    
    14,884
 December 31, 2009Carrying
    
    
    Estimatedamount
    
    
    fair value(Dollars in thousands)Financial assets:Cash and cash
equivalents
    
    $
    147,994
    
    
    
    147,994Investment securities
    
    
    306,706
    
    
    
    306,708Loans, net
    
    
    934,308
    
    
    
    943,885Financial liabilities:Deposits with stated maturities
    
    
    566,795
    
    
    
    570,791Deposits without stated maturities
    
    
    713,739
    
    
    
    713,739Securities sold under
repurchase agreements
    
    
    3,188
    
    
    
    3,188Other borrowed funds
    
    
    600
    
    
    
    600Advances from FHLB
    
    
    77,000
    
    
    
    80,670Subordinated debentures
    
    
    22,947
    
    
    
    14,793
  26




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##### Table of Contents



27




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
  Overview
     28




---



##### Table of Contents



Table 1  Selected Financial Data
 June 30,
    
    
    December 31,
    
    
    June 30,2010
    
    
    2009
    
    
    2009(Dollars in thousands)Assets
    
    $
    1,580,928
    
    
    $
    1,491,119
    
    
    $
    1,461,875Loans
    
    
    900,167
    
    
    
    937,489
    
    
    
    957,727Deposits
    
    
    1,371,442
    
    
    
    1,280,534
    
    
    
    1,191,277Annualized return on average total assets
    
    
    0.38
    %
    
    
    (0.54
    %)
    
    
    0.10
    %Annualized return on average equity
    
    
    5.94
    %
    
    
    (7.92
    %)
    
    
    1.44
    %
  29




---



##### Table of Contents



30




---



##### Table of Contents



Forward-Looking Statements
  Critical Accounting Estimates
  Allowance for Loan Losses
   31




---



##### Table of Contents



Fair Value of Financial Instruments
  Other Real Estate Owned
   32




---



##### Table of Contents



Investment Securities
  Results of Operations
     33




---



##### Table of Contents



Table 2  Selected Balance Sheet Data
 June 30,
    
    
    December 31,
    
    
    Variance2010
    
    
    2009
    
    
    Amount
    
    
    %(Dollars in thousands)Cash, due from banks
and interest-bearing deposits
    
    $
    116,486
    
    
    $
    140,694
    
    
    $
    (24,208
    )
    
    
    (17.2
    %)Federal funds sold
    
    
    7,300
    
    
    
    7,300
    
    
    
    0
    
    
    
    0.0
    %Investment securities
    
    
    455,360
    
    
    
    306,706
    
    
    
    148,654
    
    
    
    48.5
    %Loans
    
    
    900,167
    
    
    
    937,489
    
    
    
    (37,322
    )
    
    
    (4.0
    %)Other real estate owned
    
    
    7,205
    
    
    
    7,974
    
    
    
    (769
    )
    
    
    (9.6
    %)Assets
    
    
    1,580,928
    
    
    
    1,491,119
    
    
    
    89,809
    
    
    
    6.0
    %Deposits
    
    
    1,371,442
    
    
    
    1,280,534
    
    
    
    90,908
    
    
    
    7.1
    %Securities sold under repurchase agreements
    
    
    448
    
    
    
    3,188
    
    
    
    (2,740
    )
    
    
    (85.9
    %)Advances from Federal Home Loan Bank
    
    
    72,000
    
    
    
    77,000
    
    
    
    (5,000
    )
    
    
    (6.5
    %)Liabilities
    
    
    1,479,121
    
    
    
    1,397,375
    
    
    
    81,746
    
    
    
    5.8
    %Stockholders equity
    
    
    101,807
    
    
    
    93,744
    
    
    
    8,063
    
    
    
    8.6
    %
   34




---



##### Table of Contents



Net Interest Income
   35




---



##### Table of Contents



Table 3  Average Balances, Income and Expenses, Yields and Rates
 Three Months Ended June 30, 2010
    
    
    Three Months Ended June 30, 2009Annualized
    
    
    
    
    
    
    
    
    
    
    AnnualizedAverage
    
    
    Amount
    
    
    
    
    
    
    Average
    
    
    AmountAverage
    
    
    Yield or
    
    
    Paid or
    
    
    Average
    
    
    Yield or
    
    
    Paid orAmount
    
    
    Rate
    
    
    Earned
    
    
    Amount
    
    
    Rate
    
    
    Earned(Dollars in thousands)Interest-earning assets:Loans
    
    $
    937,226
    
    
    
    5.73
    %
    
    $
    13,517
    
    
    $
    986,570
    
    
    
    5.72
    %
    
    $
    14,206Investment securitiesTaxable
    
    
    376,253
    
    
    
    3.95
    %
    
    
    3,714
    
    
    
    267,540
    
    
    
    5.05
    %
    
    
    3,377Tax-exempt
    
    
    22,654
    
    
    
    4.26
    %
    
    
    241
    
    
    
    21,429
    
    
    
    4.07
    %
    
    
    218Federal funds sold
    
    
    7,300
    
    
    
    0.16
    %
    
    
    3
    
    
    
    19,980
    
    
    
    0.20
    %
    
    
    10Interest-bearing deposits in other banks
    
    
    66,515
    
    
    
    0.57
    %
    
    
    94
    
    
    
    36,181
    
    
    
    0.27
    %
    
    
    24Total interest-earning assets
    
    $
    1,409,948
    
    
    
    4.96
    %
    
    $
    17,569
    
    
    $
    1,331,700
    
    
    
    5.33
    %
    
    $
    17,835Interest-bearing liabilities:Deposits
    
    $
    1,221,701
    
    
    
    1.75
    %
    
    $
    5,319
    
    
    $
    1,072,863
    
    
    
    2.25
    %
    
    $
    6,009Federal funds purchased / securities
sold under repurchase agreements
    
    
    1,390
    
    
    
    1.44
    %
    
    
    5
    
    
    
    48,389
    
    
    
    0.79
    %
    
    
    95Other borrowings
    
    
    95,741
    
    
    
    3.73
    %
    
    
    891
    
    
    
    106,153
    
    
    
    3.87
    %
    
    
    1,023Total interest-bearing liabilities
    
    $
    1,318,832
    
    
    
    1.89
    %
    
    $
    6,215
    
    
    $
    1,227,405
    
    
    
    2.33
    %
    
    $
    7,127Net interest margin/income:
    
    
    
    
    
    
    3.19
    %
    
    $
    11,354
    
    
    
    
    
    
    
    3.18
    %
    
    $
    10,708
 Table 4  Average Balances, Income and Expenses, Yields and Rates
 Six Months Ended June 30, 2010
    
    
    Six Months Ended June 30, 2009Annualized
    
    
    
    
    
    
    
    
    
    
    AnnualizedAverage
    
    
    Amount
    
    
    
    
    
    
    Average
    
    
    AmountAverage
    
    
    Yield or
    
    
    Paid or
    
    
    Average
    
    
    Yield or
    
    
    Paid orAmount
    
    
    Rate
    
    
    Earned
    
    
    Amount
    
    
    Rate
    
    
    Earned(Dollars in thousands)Interest-earning assets:Loans
    
    $
    938,620
    
    
    
    5.71
    %
    
    $
    26,860
    
    
    $
    993,531
    
    
    
    5.63
    %
    
    $
    28,010Investment securitiesTaxable
    
    
    343,928
    
    
    
    4.01
    %
    
    
    6,901
    
    
    
    273,230
    
    
    
    5.31
    %
    
    
    7,248Tax-exempt
    
    
    22,196
    
    
    
    4.26
    %
    
    
    473
    
    
    
    19,638
    
    
    
    4.29
    %
    
    
    421Federal funds sold
    
    
    7,300
    
    
    
    0.19
    %
    
    
    7
    
    
    
    37,593
    
    
    
    0.12
    %
    
    
    22Interest-bearing deposits in other banks
    
    
    75,928
    
    
    
    0.48
    %
    
    
    182
    
    
    
    21,188
    
    
    
    0.39
    %
    
    
    41Total interest-earning assets
    
    $
    1,387,972
    
    
    
    4.95
    %
    
    $
    34,423
    
    
    $
    1,345,180
    
    
    
    5.31
    %
    
    $
    35,742Interest-bearing liabilities:Deposits
    
    $
    1,195,442
    
    
    
    1.80
    %
    
    $
    10,686
    
    
    $
    1,074,926
    
    
    
    2.40
    %
    
    $
    12,810Federal funds purchased / securities
sold under repurchase agreements
    
    
    2,219
    
    
    
    1.44
    %
    
    
    16
    
    
    
    51,913
    
    
    
    0.80
    %
    
    
    206Other borrowings
    
    
    98,011
    
    
    
    3.80
    %
    
    
    1,845
    
    
    
    105,354
    
    
    
    3.67
    %
    
    
    1,919Total interest-bearing liabilities
    
    $
    1,295,672
    
    
    
    1.95
    %
    
    $
    12,547
    
    
    $
    1,232,193
    
    
    
    2.44
    %
    
    $
    14,935Net interest margin/income:
    
    
    
    
    
    
    3.13
    %
    
    $
    21,876
    
    
    
    
    
    
    
    3.07
    %
    
    $
    20,807
  36




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##### Table of Contents



Second Quarter 2010 compared to Second Quarter 2009:
   Six Months Ended 2010 compared to Six Months Ended 2009:
    37




---



##### Table of Contents



Table 5  Rate/Volume Analysis
 Three Months EndedJune 30, 2010 compared to June 30, 2009Increase (Decrease) due toVolume
    
    
    Rate
    
    
    Combined
    
    
    Total(Dollars in thousands)Interest-earning assets:Loans
    
    
    (711
    )
    
    
    23
    
    
    
    (1
    )
    
    
    (689
    )Investment securitiesTaxable
    
    
    1,372
    
    
    
    (736
    )
    
    
    (299
    )
    
    
    337Tax-exempt
    
    
    12
    
    
    
    10
    
    
    
    1
    
    
    
    23Federal funds sold
    
    
    (6
    )
    
    
    (2
    )
    
    
    1
    
    
    
    (7
    )Interest-bearing deposits in other banks
    
    
    20
    
    
    
    27
    
    
    
    23
    
    
    
    70Total interest-earning assets
    
    
    687
    
    
    
    (678
    )
    
    
    (275
    )
    
    
    (266
    )Interest-bearing liabilities:Deposits
    
    
    834
    
    
    
    (1,338
    )
    
    
    (186
    )
    
    
    (690
    )Federal funds purchased / securities
sold under repurchase agreements
    
    
    (92
    )
    
    
    79
    
    
    
    (77
    )
    
    
    (90
    )Other borrowings
    
    
    (100
    )
    
    
    (35
    )
    
    
    3
    
    
    
    (132
    )Total interest-bearing liabilities
    
    
    642
    
    
    
    (1,294
    )
    
    
    (260
    )
    
    
    (912
    )Net change in net interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    646
  38




---



##### Table of Contents



Table 6  Rate/Volume Analysis
 Six Months EndedJune 30, 2010 compared to June 30, 2009Increase (Decrease) due toVolume
    
    
    Rate
    
    
    Combined
    
    
    Total(Dollars in thousands)Interest-earning assets:Loans
    
    
    (1,548
    )
    
    
    421
    
    
    
    (23
    )
    
    
    (1,150
    )Investment securitiesTaxable
    
    
    1,875
    
    
    
    (1,765
    )
    
    
    (457
    )
    
    
    (347
    )Tax-exempt
    
    
    55
    
    
    
    (3
    )
    
    
    (0
    )
    
    
    52Federal funds sold
    
    
    (18
    )
    
    
    14
    
    
    
    (11
    )
    
    
    (15
    )Interest-bearing deposits in other banks
    
    
    106
    
    
    
    10
    
    
    
    25
    
    
    
    141Total interest-earning assets
    
    
    470
    
    
    
    (1,323
    )
    
    
    (466
    )
    
    
    (1,319
    )Interest-bearing liabilities:Deposits
    
    
    1,436
    
    
    
    (3,201
    )
    
    
    (359
    )
    
    
    (2,124
    )Federal funds purchased / securities
sold under repurchase agreements
    
    
    (197
    )
    
    
    168
    
    
    
    (161
    )
    
    
    (190
    )Other borrowings
    
    
    (134
    )
    
    
    64
    
    
    
    (4
    )
    
    
    (74
    )Total interest-bearing liabilities
    
    
    1,105
    
    
    
    (2,969
    )
    
    
    (524
    )
    
    
    (2,388
    )Net change in net interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,069
 Provision for Loan Losses
   39




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##### Table of Contents



Noninterest Income
 Table 7  Noninterest Income
 Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Six Months EndedJune 30,
    
    
    Variance
    
    
    June 30,
    
    
    Variance2010
    
    
    2009
    
    
    Amount
    
    
    %
    
    
    2010
    
    
    2009
    
    
    Amount
    
    
    %(Dollars in thousands)
    
    
    (Dollars in thousands)Service charges and fees
on deposits
    
    $
    1,748
    
    
    $
    1,737
    
    
    $
    11
    
    
    
    0.6
    %
    
    $
    3,343
    
    
    $
    3,378
    
    
    $
    (35
    )
    
    
    (1.0
    %)Gain on sales of loans
    
    
    2,223
    
    
    
    2,461
    
    
    
    (238
    )
    
    
    (9.7
    %)
    
    
    3,576
    
    
    
    4,697
    
    
    
    (1,121
    )
    
    
    (23.9
    %)Gain (loss) on sale of fixed assets
    
    
    
    
    
    
    (42
    )
    
    
    42
    
    
    
    (100.0
    %)
    
    
    27
    
    
    
    (16
    )
    
    
    43
    
    
    
    (268.8
    %)Investment securities gains, net
    
    
    149
    
    
    
    857
    
    
    
    (708
    )
    
    
    (82.6
    %)
    
    
    162
    
    
    
    693
    
    
    
    (531
    )
    
    
    (76.6
    %)Retail investment income
    
    
    416
    
    
    
    318
    
    
    
    98
    
    
    
    30.8
    %
    
    
    751
    
    
    
    527
    
    
    
    224
    
    
    
    42.5
    %Trust services fees
    
    
    290
    
    
    
    245
    
    
    
    45
    
    
    
    18.4
    %
    
    
    577
    
    
    
    498
    
    
    
    79
    
    
    
    15.9
    %Increase in cash surrender
value of bank-owned
life insurance
    
    
    223
    
    
    
    213
    
    
    
    10
    
    
    
    4.7
    %
    
    
    452
    
    
    
    394
    
    
    
    58
    
    
    
    14.7
    %Miscellaneous income
    
    
    156
    
    
    
    123
    
    
    
    33
    
    
    
    26.8
    %
    
    
    317
    
    
    
    286
    
    
    
    31
    
    
    
    10.8
    %Total noninterest income
    
    $
    5,205
    
    
    $
    5,912
    
    
    $
    (707
    )
    
    
    (12.0
    %)
    
    $
    9,205
    
    
    $
    10,457
    
    
    $
    (1,252
    )
    
    
    (12.0
    %)
 Second Quarter 2010 compared to Second Quarter 2009:
  Six Months Ended 2010 compared to Six Months Ended 2009:
   40




---



##### Table of Contents



Noninterest Expense
 Table 8  Noninterest Expense
 Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Six Months EndedJune 30,
    
    
    Variance
    
    
    June 30,
    
    
    Variance2010
    
    
    2009
    
    
    Amount
    
    
    %
    
    
    2010
    
    
    2009
    
    
    Amount
    
    
    %(Dollars in thousands)
    
    
    (Dollars in thousands)Salaries and other
personnel expense
    
    $
    5,915
    
    
    $
    5,800
    
    
    $
    115
    
    
    
    2.0
    %
    
    $
    11,409
    
    
    $
    11,458
    
    
    $
    (49
    )
    
    
    (0.4
    %)Occupancy expenses
    
    
    1,166
    
    
    
    1,140
    
    
    
    26
    
    
    
    2.3
    %
    
    
    2,337
    
    
    
    2,281
    
    
    
    56
    
    
    
    2.5
    %Marketing & business development
    
    
    294
    
    
    
    382
    
    
    
    (88
    )
    
    
    (23.0
    %)
    
    
    588
    
    
    
    729
    
    
    
    (141
    )
    
    
    (19.3
    %)Processing expense
    
    
    392
    
    
    
    469
    
    
    
    (77
    )
    
    
    (16.4
    %)
    
    
    758
    
    
    
    961
    
    
    
    (203
    )
    
    
    (21.1
    %)Legal and professional fees
    
    
    403
    
    
    
    402
    
    
    
    1
    
    
    
    0.2
    %
    
    
    835
    
    
    
    763
    
    
    
    72
    
    
    
    9.4
    %Data processing expense
    
    
    345
    
    
    
    308
    
    
    
    37
    
    
    
    12.0
    %
    
    
    690
    
    
    
    612
    
    
    
    78
    
    
    
    12.7
    %FDIC insurance
    
    
    552
    
    
    
    1,177
    
    
    
    (625
    )
    
    
    (53.1
    %)
    
    
    1,093
    
    
    
    1,658
    
    
    
    (565
    )
    
    
    (34.1
    %)(Gain) loss on sale of other real estate
    
    
    (28
    )
    
    
    179
    
    
    
    (207
    )
    
    
    (115.6
    %)
    
    
    (369
    )
    
    
    291
    
    
    
    (660
    )
    
    
    (226.8
    %)Other real estate valuation allowance
    
    
    442
    
    
    
    
    
    
    
    442
    
    
    
    N/A
    
    
    
    697
    
    
    
    
    
    
    
    697
    
    
    
    N/AOther operating expenses
    
    
    1,081
    
    
    
    951
    
    
    
    130
    
    
    
    13.7
    %
    
    
    1,956
    
    
    
    1,889
    
    
    
    67
    
    
    
    3.5
    %Total noninterest expense
    
    $
    10,562
    
    
    $
    10,808
    
    
    $
    (246
    )
    
    
    (2.3
    %)
    
    $
    19,994
    
    
    $
    20,642
    
    
    $
    (648
    )
    
    
    (3.1
    %)
 Second Quarter 2010 compared to Second Quarter 2009:
      41




---



##### Table of Contents



Six Months Ended 2010 compared to Six Months Ended 2009:
     Income Taxes
    42




---



##### Table of Contents



Loans
  Table 9  Loan Portfolio Composition
 June 30, 2010
    
    
    December 31, 2009Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Commercial financial and
agricultural
    
    $
    96,087
    
    
    
    10.67
    %
    
    $
    102,160
    
    
    
    10.90
    %Real estateCommercial
    
    
    323,375
    
    
    
    35.92
    %
    
    
    322,864
    
    
    
    34.44
    %Residential
    
    
    232,830
    
    
    
    25.87
    %
    
    
    219,217
    
    
    
    23.38
    %Acquisition, development
and construction
    
    
    227,200
    
    
    
    25.24
    %
    
    
    270,062
    
    
    
    28.81
    %Total real estate
    
    
    783,405
    
    
    
    87.03
    %
    
    
    812,143
    
    
    
    86.63
    %ConsumerDirect
    
    
    18,432
    
    
    
    2.05
    %
    
    
    20,507
    
    
    
    2.19
    %Indirect
    
    
    1,325
    
    
    
    0.15
    %
    
    
    1,898
    
    
    
    0.20
    %Revolving
    
    
    911
    
    
    
    0.10
    %
    
    
    836
    
    
    
    0.09
    %Total consumer
    
    
    20,668
    
    
    
    2.30
    %
    
    
    23,241
    
    
    
    2.48
    %Deferred loan origination costs (fees)
    
    
    7
    
    
    
    0.00
    %
    
    
    (55
    )
    
    
    (0.01
    %)Total
    
    $
    900,167
    
    
    
    100.00
    %
    
    $
    937,489
    
    
    
    100.00
    %
    43




---



##### Table of Contents



June 30, 2010ReservesBalance
    
    
    Original
    
    
    Advanced
    
    
    Remaining(Dollars in thousands)Loan 1
    
    $
    4,219
    
    
    
    179
    
    
    
    179
    
    
    
    Loan 2
    
    
    10,213
    
    
    
    300
    
    
    
    296
    
    
    
    4Loan 3
    
    
    2,515
    
    
    
    255
    
    
    
    255
    
    
    
    Loan 4
    
    
    454
    
    
    
    30
    
    
    
    30
    
    
    
    Loan 5
    
    
    164
    
    
    
    10
    
    
    
    10
    
    
    
    Loan 6
    
    
    1,112
    
    
    
    81
    
    
    
    81
    
    
    
    
 December 31, 2009ReservesBalance
    
    
    Original
    
    
    Advanced
    
    
    Remaining(Dollars in thousands)Loan 1
    
    $
    4,278
    
    
    
    179
    
    
    
    179
    
    
    
    Loan 2
    
    
    9,666
    
    
    
    300
    
    
    
    77
    
    
    
    223Loan 3
    
    
    2,598
    
    
    
    255
    
    
    
    255
    
    
    
    Loan 4
    
    
    455
    
    
    
    30
    
    
    
    30
    
    
    
    Loan 5
    
    
    166
    
    
    
    10
    
    
    
    10
    
    
    
    Loan 6
    
    
    1,133
    
    
    
    81
    
    
    
    81
    
    
    
    
  44




---



##### Table of Contents



Loan Review and Classification Process
    45




---



##### Table of Contents



Nonperforming Assets
    46




---



##### Table of Contents



Table 10  Non-Performing Assets
 June 30, 2010
    
    
    December 31, 2009
    
    
    June 30, 2009(Dollars in thousands)Nonaccrual loans:Commercial financial and agricultural
    
    $
    637
    
    
    $
    616
    
    
    $
    690Real Estate:Commercial
    
    
    10,038
    
    
    
    2,932
    
    
    
    2,423Residential
    
    
    4,601
    
    
    
    4,623
    
    
    
    4,801Acquisition, development and construction
    
    
    16,054
    
    
    
    23,755
    
    
    
    31,266Consumer:Direct
    
    
    473
    
    
    
    331
    
    
    
    384Revolving
    
    
    
    
    
    
    
    
    
    
    Total Nonaccrual loans
    
    
    31,803
    
    
    
    32,257
    
    
    
    39,564Restructured loans (1)
    
    
    918
    
    
    
    
    
    
    
    Other real estate owned
    
    
    7,205
    
    
    
    7,974
    
    
    
    13,786Total Non-performing assets
    
    $
    39,926
    
    
    $
    40,231
    
    
    $
    53,350Loans past due 90 days or more
and still accruing interest
    
    $
    299
    
    
    $
    
    
    
    $
    3,478Non-performing assets to total assets
    
    
    2.53
    %
    
    
    2.70
    %
    
    
    3.65
    %Non-performing assets to total loans and OREO
    
    
    4.40
    %
    
    
    4.26
    %
    
    
    5.49
    %Allowance for loan loss to total non-performing loans
    
    
    74.92
    %
    
    
    69.25
    %
    
    
    40.52
    %
 (1)
    
    Restructured loans on nonaccrual status at period end are included under nonaccrual loans in
the table.   47




---



##### Table of Contents



Table 11  Other Real Estate Owned
 2010
    
    
    2009(Dollars in thousands)Beginning balance, January 1
    
    $
    7,974
    
    
    
    5,734Additions
    
    
    5,544
    
    
    
    11,304Increase in valuation allowance
    
    
    (697
    )
    
    
    Sales
    
    
    (5,985
    )
    
    
    (2,961
    )Gain (loss) on sale of OREO
    
    
    369
    
    
    
    (291
    )Ending balance, June 30
    
    $
    7,205
    
    
    
    13,786
  2010
    
    
    2009(Dollars in thousands)Other Real Estate:Single family developed lots
    
    $
    2,350
    
    
    $
    1,820Single family undeveloped land
    
    
    
    
    
    
    1,0501-4 Family residential
    
    
    1,071
    
    
    
    3,787Commercial real estate
    
    
    1,925
    
    
    
    4,243Condominums
    
    
    2,827
    
    
    
    2,8868,173
    
    
    
    13,786Valuation allowance
    
    
    (968
    )
    
    
    $
    7,205
    
    
    $
    13,786
   48




---



##### Table of Contents



Nonaccrual
    
    
    
    
    
    
    
    
    
    
    
    Appraisal
    
    AppraisedBalance
    
    
    Originated
    
    
    Date
    
    Trigger
    
    Collateral
    
    Allowance
    
    
    Method
    
    Date
    
    Value(Dollars in thousands)Commercial Real Estate
    
    $
    1,268
    
    
    
    04/08/08
    
    
    03/30/10
    
    delinquency
    
    equipment, land & stock
    
    
    
    
    
    collateral value
    
    05/10
    
    
    1,277ADC Loan  Greenville, South Carolina
    
    
    2,556
    
    
    
    03/05/08-10/01/08
    
    
    06/14/10
    
    delinquency
    
    home & land
    
    
    
    
    
    collateral value
    
    05/10
    
    
    2,840ADC Loan  Savannah, Georgia
    
    
    1,523
    
    
    
    09/30/08
    
    
    05/06/10
    
    delinquency
    
    lots
    
    
    
    
    
    collateral value
    
    06/10
    
    
    1,650ADC Loan  CSRA
    
    
    1,247
    
    
    
    12/16/05-02/19/10
    
    
    11/09-2/10
    
    delinquency
    
    lots & land
    
    
    
    
    
    collateral value
    
    03/10
    
    
    1,7611-4 Family Residential
    
    
    1,162
    
    
    
    10/22/07-09/04/08
    
    
    11/30/09
    
    delinquency
    
    houses & lots
    
    
    
    
    
    collateral value
    
    03/10
    
    
    1,173Commercial Real Estate
    
    
    963
    
    
    
    12/07/06-01/20/09
    
    
    06/21/10
    
    financial condition
    
    land
    
    
    
    
    
    collateral value
    
    1/06-5/07
    
    
    1,5271-4 Family Residential
    
    
    899
    
    
    
    04/19/07
    
    
    06/21/10
    
    financial condition
    
    home
    
    
    68
    
    
    collateral value
    
    6/10 - listing
    
    
    995ADC Loan  CSRA
    
    
    1,060
    
    
    
    08/17/07-05/02/08
    
    
    12/30/09
    
    delinquency
    
    lots
    
    
    
    
    
    collateral value
    
    12/09
    
    
    1,220ADC Loan  CSRA
    
    
    3,242
    
    
    
    08/25/06
    
    
    08/17/09
    
    delinquency
    
    lots & land
    
    
    
    
    
    collateral value
    
    09/09
    
    
    6,333Commercial Real Estate*
    
    
    3,919
    
    
    
    12/19/08
    
    
    01/15/10
    
    delinquency
    
    golf course
    
    
    
    
    
    collateral value
    
    03/10
    
    
    8,100ADC Loan  CSRA*
    
    
    2,668
    
    
    
    01/02/07-03/01/10
    
    
    1/10-3/10
    
    delinquency
    
    homes, lots & land
    
    
    
    
    
    collateral value
    
    03/10
    
    
    2,002ADC Loan  Athens, Georgia
    
    
    2,413
    
    
    
    08/18/06-01/10/07
    
    
    01/28/09
    
    delinquency
    
    land & townhomes
    
    
    
    
    
    collateral value
    
    02/09
    
    
    3,526$
    22,920Other, net
    
    
    8,883Nonaccrual loans at June 30, 2010
    
    $
    31,803*ADC Loan cross collateralized by CRE
 Allowance for Loan Losses
      49




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##### Table of Contents



Table 12  Acquisition Development and Construction Loans
 June 30,
    
    
    December 31,2010
    
    
    2009(Dollars in thousands)CSRA  primary market areaPeriod-end loans
    
    
    173,265
    
    
    
    195,394Impaired loans
    
    
    7,448
    
    
    
    11,278Classified/watch rated loans
    
    
    31,819
    
    
    
    27,237Charge-offs % (annualized)
    
    
    1.31
    %
    
    
    0.44
    %Specific reserve allowance / Impaired loans
    
    
    0.00
    %
    
    
    10.29
    %General reserve allowance / Loans not impaired %
    
    
    2.88
    %
    
    
    2.10
    %Allowance / Charge-offs
    
    
    2.40
    
    
    
    6.94Savannah, GeorgiaPeriod-end loans
    
    
    13,475
    
    
    
    19,666Impaired loans
    
    
    1,750
    
    
    
    1,300Classified/watch rated loans
    
    
    1,331
    
    
    
    4,064Charge-offs % (annualized)
    
    
    13.45
    %
    
    
    11.21
    %Specific reserve allowance / Impaired loans
    
    
    0.00
    %
    
    
    8.62
    %General reserve allowance / Loans not impaired %
    
    
    3.22
    %
    
    
    3.42
    %Allowance / Charge-offs
    
    
    0.21
    
    
    
    0.34Athens, GeorgiaPeriod-end loans
    
    
    16,460
    
    
    
    20,031Impaired loans
    
    
    3,332
    
    
    
    8,457Classified/watch rated loans
    
    
    2,256
    
    
    
    2,742Charge-offs % (annualized)
    
    
    (2.04
    %)
    
    
    47.59
    %Specific reserve allowance / Impaired loans
    
    
    0.00
    %
    
    
    0.00
    %General reserve allowance / Loans not impaired %
    
    
    10.66
    %
    
    
    10.68
    %Allowance / Charge-offs
    
    
    (4.17
    )
    
    
    0.13ADC Participations  GeorgiaPeriod-end loans
    
    
    6,500
    
    
    
    9,893Impaired loans
    
    
    
    
    
    
    3,393Classified/watch rated loans
    
    
    6,500
    
    
    
    6,500Charge-offs % (annualized)
    
    
    45.05
    %
    
    
    47.41
    %Specific reserve allowance / Impaired loans
    
    
    0.00
    %
    
    
    20.81
    %General reserve allowance / Loans not impaired %
    
    
    9.51
    %
    
    
    9.50
    %Allowance / Charge-offs
    
    
    0.21
    
    
    
    0.28ADC Participations  FloridaPeriod-end loans
    
    
    3,600
    
    
    
    4,034Impaired loans
    
    
    600
    
    
    
    1,034Classified/watch rated loans
    
    
    
    
    
    
    Charge-offs % (annualized)
    
    
    10.83
    %
    
    
    10.26
    %Specific reserve allowance / Impaired loans
    
    
    0.00
    %
    
    
    0.00
    %General reserve allowance / Loans not impaired %
    
    
    10.00
    %
    
    
    10.00
    %Allowance / Charge-offs
    
    
    0.77
    
    
    
    0.72
  50




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Table 13  Allowance for Loan Losses
 June 30,2010
    
    
    2009(Dollars in thousands)Total loans outstanding at end of period,
net of unearned income
    
    $
    900,167
    
    
    $
    957,727Average loans outstanding, net of
unearned income
    
    $
    912,181
    
    
    $
    971,139Balance of allowance for loan losses at
beginning of year
    
    $
    22,338
    
    
    $
    14,742Charge-offs:Commercial, financial and agricultural
    
    
    343
    
    
    
    429Real estate  commercial
    
    
    463
    
    
    
    Real estate  acquisition, development
and construction
    
    
    4,838
    
    
    
    7,100Real estate  residential mortgage
    
    
    564
    
    
    
    1,213Consumer
    
    
    290
    
    
    
    332Total charge-offs
    
    
    6,498
    
    
    
    9,074Recoveries of previous loan losses:Commercial, financial and agricultural
    
    
    116
    
    
    
    207Real estate  commercial
    
    
    5
    
    
    
    Real estate  acquisition, development
and construction
    
    
    530
    
    
    
    1Real estate  residential mortgage
    
    
    33
    
    
    
    168Consumer
    
    
    220
    
    
    
    124Total recoveries
    
    
    904
    
    
    
    500Net loan losses
    
    
    5,594
    
    
    
    8,574Provision for loan losses
    
    
    7,082
    
    
    
    9,863Balance of allowance for loan losses at
end of period
    
    $
    23,826
    
    
    $
    16,031Allowance for loan losses to period end
loans
    
    
    2.65
    %
    
    
    1.67
    %Annualized net charge-offs to average loans
    
    
    1.24
    %
    
    
    1.78
    %
  51




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Liquidity and Capital Resources
    52




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##### Table of Contents



Table 14  Regulatory Capital Requirements
June 30, 2010
 Required for capitalActual
    
    
    adequacy purposes
    
    
    ExcessAmount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Southeastern Bank Financial
CorporationRisk-based capital:Tier 1 capital
    
    $
    117,937
    
    
    
    11.75
    %
    
    
    40,139
    
    
    
    4.00
    %
    
    
    77,798
    
    
    
    7.75
    %Total capital
    
    
    132,388
    
    
    
    13.19
    %
    
    
    80,277
    
    
    
    8.00
    %
    
    
    52,111
    
    
    
    5.19
    %Tier 1 leverage ratio
    
    
    117,937
    
    
    
    7.62
    %
    
    
    61,877
    
    
    
    4.00
    %
    
    
    56,060
    
    
    
    3.62
    %Georgia Bank & Trust CompanyRisk-based capital:Tier 1 capital
    
    $
    102,884
    
    
    
    11.65
    %
    
    
    35,327
    
    
    
    4.00
    %
    
    
    67,557
    
    
    
    7.65
    %Total capital
    
    
    114,057
    
    
    
    12.91
    %
    
    
    70,654
    
    
    
    8.00
    %
    
    
    43,403
    
    
    
    4.91
    %Tier 1 leverage ratio
    
    
    102,884
    
    
    
    7.47
    %
    
    
    62,001
    
    
    
    4.50
    %
    
    
    40,883
    
    
    
    2.97
    %Southern Bank & TrustRisk-based capital:Tier 1 capital
    
    $
    14,415
    
    
    
    12.12
    %
    
    
    4,758
    
    
    
    4.00
    %
    
    
    9,657
    
    
    
    8.12
    %Total capital
    
    
    15,908
    
    
    
    13.37
    %
    
    
    9,517
    
    
    
    8.00
    %
    
    
    6,391
    
    
    
    5.37
    %Tier 1 leverage ratio
    
    
    14,415
    
    
    
    8.20
    %
    
    
    7,029
    
    
    
    4.00
    %
    
    
    7,386
    
    
    
    4.20
    %
   Commitments and Contractual Obligations
   53




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Table 15  Commitments and Contractual Obligations
 Less than
    
    
    1 - 3
    
    
    3 - 5
    
    
    More than1 Year
    
    
    Years
    
    
    Years
    
    
    5 Years(Dollars in thousands)Lines of credit
    
    $
    133,778
    
    
    
    
    
    
    
    
    
    
    
    Lease agreements
    
    
    307
    
    
    
    352
    
    
    
    91
    
    
    
    44Deposits
    
    
    1,207,063
    
    
    
    147,050
    
    
    
    15,934
    
    
    
    1,395Securities sold under
repurchase agreements
    
    
    448
    
    
    
    
    
    
    
    
    
    
    
    FHLB advances
    
    
    20,000
    
    
    
    10,000
    
    
    
    3,000
    
    
    
    39,000Other borrowings
    
    
    900
    
    
    
    
    
    
    
    
    
    
    
    Subordinated debentures
    
    
    
    
    
    
    
    
    
    
    2,947
    
    
    
    20,000Total commitments and
contractual obligations
    
    $
    1,362,496
    
    
    $
    157,402
    
    
    $
    21,972
    
    
    $
    60,439
   54




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##### Table of Contents



Effects of Inflation and Changing Prices
  Regulatory Reform Legislation
  
 
 
 
 
  55




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##### Table of Contents




 
 
 
 
 
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
   56




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##### Table of Contents



Part II
OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Issuer Purchases of Equity Securities
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
   57




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##### Table of Contents



Item 6. Exhibits
 31.1
    
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.31.2
    
    
    Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
  58




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##### Table of Contents



SOUTHEASTERN BANK FINANCIAL CORPORATIONDate: July 30, 2010
    By:
    /s/ Darrell R. RainsDarrell R. RainsGroup Vice President, Chief
Financial Officer (Duly Authorized
Officer of Registrant and Principal
Financial Officer)  59